In the field of Supply Chain Management, little has changed in the Supplier Selection Process and Supplier Selection Criteria. Spending categories are generally segregated based on volume and assigned into a non-critical, strategic or bottleneck category. Bottleneck categories items are often the most difficult to manage as they require primary and secondary, or multiple supply sources. Strategic items are often used for Supplier Collaboration initiatives where you choose supplier-partners that get involved in product development, collaborative forecasting and planning and sharing or inventory information and other critical operational data.
the world of BPO and ITO have revolutionized how to view Strategic Sourcing.
However, during this time the world of Business Process Outsourcing (BPO) and Information Technology Outsourcing (ITO) have revolutionized how to view Strategic Sourcing. Based on the work by Oliver Williamson, the 2009 Nobel Award Winner for Economics, companies view outsourcing based on Transaction Cost Economics. He viewed sourcing as a continuum versus a simple make-versus-buy decision. Supplier Evaluation is conducted based on the information below.
The seven sourcing business models are:
- Basic Provider: This is a transaction-based model where there are numerous suppliers, prices are readily known and there is little differentiation among offerings.
- Approved Provider: Goods and services are purchased from suppliers that meet pre-defined qualifications such as quality and service-performance. Usually a supplier in this category can be readily replaced.
- Preferred Provider: The goods or services purchased from a Preferred Provider can be similar to an Approved Supplier, however the buyer has chosen to move to a more strategic and relational approach. This can result in a streamlined buying process.
- Performance-based: This model is where the BPO/ITO industry began to change Strategic Sourcing. These involve longer-term and more formal supplier agreements that require achieving performance or savings targets.
- Vested-business: These relationships are highly collaborative and create value for the buyer and supplier. Ideally, entire supply chains would involve a vested business model across multiple echelons from raw materials, service providers to the consumer.
- Shared-services: In this model the company keeps the capability in-house, usually in a centralized organization, and offers these services, for a fee, to the company’s business units.
- Equity partnerships: If an organization does not have the internal capability, but wants some control, it can enter into an equity partnership with a supplier to fund a shared-services organization.
There is no single answer to which model to adopt. It will depend on whether the performance you need is transaction-based, output-based or outcome-based.
- Transaction-based: Economics tied to activities
- Output-based: Manage based on “service level agreement”
- Outcome-based: Economics tied to overall success of the partnership
As you move from transactions to output, and finally to outcomes, the investment in time from your supply chain staff, and entire organization, will increase. Therefore, very few suppliers will move to the relational stage and perhaps only one or two to the outcome level of collaboration.
